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| − | Financial institution in sub-saharan africa are classified by large loan size, high margin profile and low volume business which is the opposite of financial service to the base of the pyramid (BoP) | + | Financial institution in sub-saharan africa are classified by '''large loan size, high margin and low business volume''' which is the opposite of financial services to the base of the pyramid (BoP). They have not able to establish a commercially viable channel to reach out to the bulk of the african markets mainly due to: |
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| | + | *Entry-level accounts for low-income clients are likely to have low balances, make few transactions and use of fixed physical infrastructure such as bank branches and automated teller machines (ATMS) which in end might result in loss for the bank rather than profit. |
| | + | *Due to issues like high-collatoral requirement, time-consumeing applications and inefficient cash management and inefficeint cash managements, fiancial institutions mostly focus on the salaried, relatively better-off segments of their markets. |
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| + | therefore, the OECs present an opportunity for financial institutions to reach the low-income population in a viable manner. |
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| | = Reference = | | = Reference = |
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| | This article is based on the following publications | | This article is based on the following publications |
Revision as of 09:36, 2 September 2016
Off-grid energy Companies and Financial Institutions - Need for Collaboration
Introduction
Off-grid energy companies (OCEs) in this article refers to those companies in Africa that sell solar energy systems based on PAYG model. These are the fastest growing companies with an average of 500 customers per day.
Natural Progression from Energy Provider to Consumer Finance
To increase their revenue and to keep ahead of competitiors, there is a natural tendeny for OECs to also provide secondary loans to existing customers, for activities such as buying a motobike or other appliances. For the secondary loans, the energy system will be switched off in case of failure to pay on time and the secondary assessts might also be repossesed.
Along with added revenue, the other benefits of providing consumer finanance are:
- For many customers in rural areas, buying energy services from OECs might be the first time they had access to financial services
- PAYG also promote mobile transactions reducing tthe transaction cost.
However, OCEs companies are not financial institutions and in many countries they are not allowed to offer secondary loans. Therefore, there is a need as well as opportunity for successfull collaboration between OECs and Financial institutions.
Resources of Off-grid Energy Companies and Financial Institutions
The table below shows the simplified analysis of the resources of off-grid energy companies and financial institutions.
|
Off-grid Energy Companies
|
Financial Institution
|
| Assets
|
Agent network
|
Branch network
|
IT system for account management
|
customer relationship
|
| Cloud-based customer relation management (CRM) systems
|
banking expertise
|
| Leverage over customers
|
credit assessment
|
|
banking license
|
| Financial products
|
Loans
|
|
|
Saving accounts
|
|
|
Money transfer services
|
| key strengths
|
Ability to reach lower-income populations at scale, profitably with financial services
|
Banking license and know -how
|
| key weakness
|
banking license and know-how
|
Ability to reach lower-income populations at scale, profitably, with financial services
|
Challenges for the OECS
Large Portfolio of loans
Most of the OECs started out as energy system retailers but with PAYG model have amassed a large portfolio of loans. Managing these large portfolio of loans is outside their core competence and requires skilled financial capabilities. The loan also has to be refinanced. For example, if an installed system cost on average USD 150, then to reach 1 million consumers, the sector will have to raise around USD 150 million in consumer loans.
will have to be raised in consumer loans and as the sector expands the amount in consumer loan will also increase.
Foreign exchange Risk
Most of the consumer loan are in the local currency while the capital to finance OECs is raised in hard currency such as USD or Euro:> greater risk in the system
Lack of expertise to handle consumer loan portfolios
Potential of merging between oecs and financial institutions.
Oecs have ideal small loan delivery channel with highly automated, cashless accounting and significant leverage over the borrower. In a nutshell, they have the infrastructure in place to effectively manage small loans offered to a relatively remote and unknown customers.these factors also contribute to their high repayment rates as opposed to what the borrower's profile might suggest.
On the other hand they lack large scale funding at a reasonable cost and the abilities to manage a portfolio of loans.
They offer to increase the Bank's customer base but it will depend on the bank's ability to profitable serve those customers or not.
Financial Institutions
Financial institution in sub-saharan africa are classified by large loan size, high margin and low business volume which is the opposite of financial services to the base of the pyramid (BoP). They have not able to establish a commercially viable channel to reach out to the bulk of the african markets mainly due to:
- Entry-level accounts for low-income clients are likely to have low balances, make few transactions and use of fixed physical infrastructure such as bank branches and automated teller machines (ATMS) which in end might result in loss for the bank rather than profit.
- Due to issues like high-collatoral requirement, time-consumeing applications and inefficient cash management and inefficeint cash managements, fiancial institutions mostly focus on the salaried, relatively better-off segments of their markets.
therefore, the OECs present an opportunity for financial institutions to reach the low-income population in a viable manner.
Reference
This article is based on the following publications
